What is the difference between a Director, Officer and Shareholder of a Corporation?
Organizing your company’s management is one of the first things you will want to do when you are starting your business. You will want to appoint a board of directors along with directors, officers and shareholders. While private corporations may be small enough to have one person serving in all three roles, larger corporations—both public and private—will require a greater number and variety of people providing expertise their area of specialty. The following will provide you with an overview of the role of directors, officers, and shareholders in smaller private and family corporations so that you are ready to hit the ground running after you have incorporated.
What is the difference between a shareholder, a director and an officer of a corporation?
Shareholders hold ownership of the corporation in the form of shares and exercise their control through voting rights. Shareholders are passive owners. They are not obligated nor required to operate the day to day management of the business. Shareholders are free to sit back and receive the distribution of profit on an annual basis proportionate to their shareholdings.
Shareholders elect directors to the board of directors to oversee and manage the business operations. In a small business corporation, very often the shareholders and the directors are one and the same persons. However it is important to distinguish the different attributes of these roles. Shareholders are not active in a business, they are mere owners. A shareholders right to vote relates not to the day-to-day operations of a business (such as hiring, firing, pricing, purchasing, sales, revenue models) but only relate to the shares themselves. For example, a shareholder will have a right to vote in relation to bringing on a new shareholder and diluting their own shares down.
At the end of the day, since shareholders elect directors to run the business and can also remove directors at any time, the puck stops with the shareholder. As owners, shareholders sit at the top of the totem pole or hierarchy of the corporate positions within a corporation.
It is important to note there are no residency requirements or prohibitions for shareholders. 100% of a Canadian corporation can be owned by a resident of China, India or Ireland. However, the legal implication of a non-resident owning more than 50% of the shares of a corporation will mean that the corporation will not be deemed to be Canadian-owned, and as a result, will lose out on a formidable tax savings. The tax rate inside the corporation will increase from 12.2% (combined in Ontario) to 26.5%. If you wish to make a non-resident of Canada a shareholder of a Canadian corporation, best is to ensure they own less than 50% of the issued capital.
Shareholders do not have any entitlement to receive a salary as shareholders do not actively ‘work’ for the business. It is the directors who work for the business and who are entitled to receive a salary under tax law. Shareholders may receive only the distribution of profit drawn from the retained earnings of a corporation on an annual basis, proportionate to the percentage of shareholdings that shareholder holds. In other words, a shareholder owning 15% of the issued capital of a corporation will receive 15% of its annual profit.
Directors are responsible for managing the activities and business operations of the corporation and for making decisions regarding those activities. Directors approve budgets and important contracts. They also decide key matters relating to business operations such as hiring, firing, purchasing and sales, revenue models, risk and other key components to running a business. It is important to note that directors also determine when to declare dividends which are annual profit distributions to the shareholders. It is the directors, and not the shareholders, that manage the operations of a business.
The maximum and minimum number of directors is stated in the Articles of Incorporation. Each privately held corporation must have at least at least one director and one shareholder. In larger corporations, a board of directors is comprised of several directors who manage the business operations in concert.
In Ontario and presently for Canadian federal corporations, at least one director must be a resident of Canada.
There are two types of directors, “inside directors” are elected from within the company and either have a direct stake in the success of the business or work in the daily operations. In other words, they are also shareholders. Outside directors are elected from outside the company and are brought in to share their unbiased and impartial perspective. Outside directors are not shareholders, but are merely high ranking employees.
Directors do receive salaries as directors are really just high-ranking employees of a corporation (however it should be noted, are not deemed to be employees for the purposes of the Employment Standards Act or the Labour Board). The point is that directors are not owners. They are hired by the corporation to run its day-to-day affairs. The salary withdrawn must be proportionate to the work performed in the sense that it must be the same reasonable salary you would pay an arm’s length person for similar work, otherwise the value of the salary could violate federal tax law.
Officers are appointed by directors to manage certain subsets of a business. Whereas the board of directors have the purview of the entire corporation, officers are given a smaller slice of the corporation. For example, a Chief Marketing Officer’s purview is marketing only. The CMO reports back to the board of directors who manage the entire business and oversee all of its operations.
In a small corporation, it is possible for one person to hold all these positions and to perform all the duties. One individual can be the sole shareholder, director, officer of a corporation. Often, however, when a corporation begins to grow, more people will be needed to manage and direct the corporation.
Among the officers are those who have a greater management role, and these include the Chief Executive Officer, the highest ranking executive who is responsible for the corporation’s operations at every level. Other corporate officers are the Chief Operations Officer (COO), who is the second in command, and oversees the daily business operations and reports directly to the CEO. Finally there is the Chief Financial Officer (CFO) who is in charge of the corporation’s finances, determines risks, devises financial plans, and oversees audits and record keeping.
Structuring your upper management is an important step to ensuring the success of your corporation. When determining roles, consider each person’s strengths and weaknesses and their particular specialties and know how that they bring to the table. The most important credential however that is each director and officer must be committed to the success of the company and must not be in a conflict of interest.
Reach out to a lawyer at Kalfa Law for some more personal advice and guidance in how to structure the upper management of your corporation. We’re here to help™
-Shira Kalfa, Founder & Partner
© Kalfa Law, 2021
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.